Institute for Social and Economic Change
Working Paper: 344
Tax Contribution of Service Sector: An Empirical
Study of Service Taxation in India
Mini Thomas P
This paper attempts to study service taxation in India from a macro-economic perspective, focusing on broad questions such as the level and composition of service tax revenue during the time-span of the “positive list approach” from 1994-95 to 2011-12. The income elasticity of service tax revenue collection is estimated for the Indian economy with the help of pooled FGLS, utilising data from Directorate of Service Tax and National Account Statistics. The importance of service tax as a consumption-based tax is also analysed descriptively. The study finds that the contribution of service tax towards the Centre’s tax revenue is not commensurate with the high share of services in India’s GDP. The study finds that “business services” and “real-estate and ownership of dwellings” have emerged as the major service tax revenue earners in recent years. The study finds income elasticity of service tax revenue collection to be less than 1, which when juxtaposed with India’s low tax-GDP ratio, points to the existence of untapped revenue potential for service taxation in the country.